June 11, 2014
M&A Market is on Fire…Another Bubble or Smart Business?
Facebook makes a blockbuster move and acquires WhatsApp for $19 billion. Is that the sign that we have reached a silly overheated M&A market? Last month we hit $1.2 trillion of global M&A volume, the highest dollar volume since 2007, when we hit $1.4 trillion in the same time-period. Banks are back lending to the private equity community at unprecedented levels. At first glance, when you add the simple facts together, one could certainly conclude that we are once again poised for a “bursting of the bubble.”
We disagree! If you take a closer look at the facts you will see a very different picture than what we faced in 2007. First, while the lenders are lending into deals, it is nowhere near as prevalent as it was in 2007. In the first four months of that year, over 76% of the M&A deals were done with all cash. This year so far, only 47% of the deals have been done as all cash. In contrast, all stock deals this year are at 19% versus 8% in 2007. One of the other key variables we look at is the interest rate environment. In Q1 2008, LIBOR was at an average of 3.42%. Today, the one month LIBOR rate is at 15 basis points – effectively a 95% discount on the cost of funds.
Today’s M&A market is really characterized by large, well-capitalized businesses making key strategic acquisitions, many of which have been “planned” for several years, using a combination of cash and stock. These deals have real strategic merit and realizable synergies. Part of the reason that we are seeing the resurgence is that CEO’s are finally gaining some confidence in the recovery. In addition, with the equity markets rising by over 30% last year while M&A remained relatively flat in 2013, you are seeing the historic correlation between the equity markets and M&A come back into sync as the M&A markets are playing catch up in early 2014.
Finally, we have had some very large transactions in the Pharma and Telecom markets, which are skewing the numbers. With over 13 deals this year in excess of $10 billion, representing about a third of total M&A dollar volume, we see a disproportionate share relative to the historic 22% “mega deal” percentage over the last 20 years.
As you dig deeper, you see a myriad of facts that show a very different picture than what we had in 2007 and 2008. We do not believe we are in a bubble that is unsustainable. We see a continued robust M&A market at healthy values as both private equity and strategic acquirers are capitalizing on a renewed confidence and economic recovery that is enabled by lower cost capital from both the debt and equity markets. We expect a strong M&A pace to continue for the remainder of the year.